United Airlines Holdings, Inc. (UAL) Earnings Call Transcript & Summary

This presentation is actually being webcast. So we need to be as on time as we possibly can be. Anyway, I'm Helane Becker, TD Cowen, Senior Analyst covering Airlines, and I'm joined this morning by Gerry Laderman, Chief Financial Officer of United Airlines. And Gerry is joined by Kristina Munoz who is Director of Investor Relations at United. And is Katlynn here? Oh, there you are. I didn't see you sneak over there and Katlynn Kennedy, who is also in Investor Relations. So thanks very much for being here. You guys did an 8-K this morning.

We did.

So maybe my first question was, did you want to update guidance before we get into the Q&A?

Nothing more than what we said in the 8-K, where we -- as everybody knows, fuel jumped up a bit right after everybody's earnings call. So I don't think we were alone in updating fuel for the third quarter to reflect the fact that fuel has gone up 20-ish percent. So our new range is -- the 8-K was we moved from a midpoint of $2.65 to a midpoint of $3, at $2.95 to $3.05 range and everything else for the third quarter, capacity, revenue, CASM, we just reiterated what we had said in the original guidance.

Right. I saw that. I saw the only thing that changed was fuel. That was it. So let's talk about the outlook for the business. There was some severe weather on the West Coast last month. And you guys have and I actually have 2 unrelated questions. So it's just like typical of me, if you know me from the conference call. So the first question is, can you talk about how those might have impacted, those cancellations related to the weather might have impacted operations. And I don't know if you want to put Hawaii in there. And because you have a pretty big operation from Denver, from Newark, from Chicago, you fly -- San Francisco, quite a lot of Mainland to Hawaii. So I don't know if you want to talk about that at all.

So I think, Helane, the real story for the summer was the heat. And what that heat did to the weather in the system, particularly on the East Coast, one, chain of thunder storms after another, after another, after another really going into July. And as you know, when you have disruptions like that, it impacts the reliability of the operation. And so we -- and others, but we were hit with more than the usual number of cancellations. And there's nothing better for CASM in my mind and having a reliable operations. So when you're having cancellations and whatnot, that does impact, in my world, it impacts CASM but we still have reiterated our guidance for the quarter. And it's fair to say that August, we saw a much better weather. In fact, August for us operationally was probably the best August since the merger. So we did see some of that. So yes, it was the weather in July that really took a toll on everybody.

Okay. So the other place where you are really ahead of the curve was in Europe, right? You added a lot of capacity to -- well, you were ahead of the curve all through the pandemic.

I was about to say, we were unique, we did not retire our wide-body fleet in anticipation of a bound, and we saw that rebound.

Right. And then you added some really interesting destinations. I would have appreciated if you could have kept Tenerife until maybe January, but somehow it's gone.

You need to tell more of your friends to fly to Tenerife.

Yes, it becomes a double connect actually. And like 24-hour, like you leave on the 25th and get there on the 27th, which is not a lot of fan. But anyway, that's not my question. My question is, you added a lot of capacity into Europe and into leisure destinations, which is unique among airlines. But now I see next summer, a lot of other airlines are copying you. So again, ahead of the curve, are you guys concerned that maybe there's going to be overcapacity in that market? And I noticed, by the way, you're sort of softening that with Asia and you're growing Asia for next summer, too.

Yes. So we did it in steps. We added capacity where it was appropriate to add capacity. And as you know, the rebound in Asia has been slower than the rebound transatlantic. And it's a combination of a number of factors. So working with our alliance partners, it was rightsizing capacity into their hubs. It was working with new partners, both -- on both sides of -- in both oceans, our alliance with Virgin Australia got off to a great start and our new alliance with Emirates as well.

Yes, you added more cities.

That's right, new opportunities. And so we supplement that with secondary markets, some of them, as you pointed out, where we have felt there have been really good opportunities. And given the location of our international hubs New York, Washington, West Coast, San Francisco, we are much better positioned than many of our peers to take advantage of those opportunities.

Yes. It's kind of interesting. I always tell these stories on myself about places where I've been wrong. But in December 19, 2019, I wrote a report about how airlines were overflying their partner hubs and that maybe the alliances going forward would be less important than they've been in the past because you guys were going, like United was a prime example going instead of connecting in Frankfurt, going direct to places like Sicily and Naples and places other people want it to go to. And then, of course, the pandemic hit and the alliances are more important now, right? So it's like whatever, it is what it is. I do the best I can. So I wanted to ask you about the recent purchase of 200 acres in Denver. There's some speculation that the Board is thinking of moving the corporate headquarters there and leaving Chicago. Is that -- is there any truth to that?

There are no imminent plans for that. We have a long-term lease at the Willis Tower, our headquarters. We've been there for decades in Chicago. It's fair to say Denver is like Houston, if you went down to Houston, we have a lot of facilities induced, we have our in-flight training centers there. We have all sorts of operations there. Denver is the same way. Keep in mind that in Denver is our flight training center. I think it's the largest in the world now. That space, which is right by the old Stapleton Airport. We've outgrown it. And so one of the first things we'll do with that new space we have is we have now a location to be able to expand the flight training center. And then over the years, we'll find other opportunities.

Okay. This is a little off topic, but can you say when the pilot will be done?

Yes, that's not for me to talk about.

Okay. No, I just -- I haven't seen the date and most of the other airlines like give a date for when the -- It's not from the airlines, it's from the union.

Yes. We let them talk about the process.

Okay. So coming out of the pandemic, what do you think the biggest surprises are that you've seen?

I think for me, the biggest surprise over the last 1.5 years and not just in the airline business, but business generally, the difficulty in kind of restoring everything back to where it was pre-pandemic. I think the entire world underestimated issues like the labor shortages, the supply chain issues. I don't think we did a wonderful job as an entire world really managing that. And so we've seen it in the airline business, both with hiring. It's in some locations, been more difficult than we would have expected. And then obviously, supply chain from the aircraft manufacturers down to the catering and what we would have available to put on our airplanes. Everywhere we looked, there were unexpected delays in the supply chain process.

Interesting. I find it frustrating too, but for other reasons. And everything has gotten more expensive. I think that's the other thing, right? The catering, food has gotten more...

Some people say airplane tickets have gotten more expensive also.

Well, on a relative basis, I don't think so, right?

Well, so we're margin-focused. And so as our costs have gone up, we've been able to generate that incremental revenue to offset that. So it's more about margin than it is about absolute cost or absolute revenue.

As you think -- you and I have done this for a really long time, although I prefer not to think really long, just a while. How do you think about, I feel like I've seen this movie before, right? It's cost or a infrastructure issues, capacity can't grow necessarily because of all sorts of issues over which you have no control. And one of the things you guys are doing is replacing smaller aircraft with larger aircraft, so more seats per departure, maybe fewer departures a day. Newark as a hub is constrained. And yet, I think that -- I don't know what's the local versus connect traffic there? It must be reversed from what you would think, right?

It's obviously the strongest local market in the country.

Yes. Yes, I would think that's true. So I worry that this can't end well for the airlines.

I can't speak about how it'll end for other airlines. I can speak to how we would expect it to end, by the way, we have been in this business a long time, I haven't -- in fact I thought you were going to introduce me as the soon-to-be former CFO of United Airlines.

Well, that's for you to talk about. We can come back to that.

We can talk about that later. But anyway, let's start with United Next. So United Next really was putting back in place. The plan we had pre-COVID where we had recognized -- if you go back to the merger through the last decade, we kind of went in the wrong direction. We shrank when everybody else grew. We did not take advantage of the natural opportunities we had in the best hubs in the country as far as we're concerned and recognize that we needed to rightsize particularly the domestic hubs. And COVID hit. So we had to take a little bit of a pause. But then United Next was really bringing that back. And so the order that we made, which initially largely -- well, it's a combination, I would describe it as growth in replacement because keep in mind, while the main line has been growing, the regional fleet has been shrinking. So there's been some of that replacement as we truly upgauge from regionals to mainline and stop flying regionals where we never should have been flying regional aircraft to begin with is you witnessed that, as you were back in the day. And so that's a unique opportunity for us. It's a unique opportunity to rightsize our hubs, to add connectivity, to grow relatively inexpensively. I mean the cheapest way to grow is gauge, and we were behind everybody. And so we have that unique United opportunity to grow with gauge domestically. And you're right about Newark, Newark is kind of at capacity. So the growth in Newark is also about gauge and making sure in addition to the local market to bring in the customers who then want to use Newark to connect transatlantic.

Yes. I mean it's -- the service is great as long as the airport can handle it. And unfortunately, the airport can't always handle it, and it's not through any fault of your own. It's just -- it's add capacity.

Just generally, we've been as focused on the infrastructure on the ground as we have on having the right aircraft and having enough aircraft. So a lot of time and ultimately some money is going to be spent throughout the system, making sure that we can handle the traffic, the customers that we expect in our hubs as we implement the plan.

Okay. Another place where you guys are leading edge is in sustainability and your United ventures. So how do you think about that? The investment you're pulling in from other airlines to kind of grow SAF and some of the other things that you guys are doing. How do you see that playing out over the next, I don't know, 10 or 20 years especially because the decisions you're making now on aircraft, it's not like these aircraft are going away in 2040 or 2045. You and I probably are not going to be doing these jobs anymore. You're definitely not. Although we were watching CNBC and they talked about Charlie Munger, who works with Warren Buffett and one of the announcers said, you're still doing this at 99, and my husband looked at me and said, oh, that will be you, and I thought that was really, really not true, and I was like because I probably won't be here at 99, but that's another story. Anyway, so how are you thinking about just that...

What? Working at 99?

No, working SAF and all that future of SAF and so on?

We and others have a commitment, zero carbon. And the only way the industry is going to get there is really through the research necessary to come up with cost-effective ways to produce sustainable aviation fuel. And what ventures and the fund is all about is having the money to invest in those new ideas by setting up the fund and attracting money from some of our partners and some others. It builds on itself that as more and more companies sort of see this that there are opportunities more and more money will be attractive, that's what it's going to take to solve the problem. So we're not necessarily going to succeed with every investment. That's not necessarily the point. The point is to find the 1 or 2 or 3 ideas that really will work.

Okay. You and I have talked about owning versus leasing aircraft in the past. United, you have a big CapEx plan at United over the next few years that you're leaving as one of your legacies. And a few years ago, pre-pandemic, we were in Dublin. And you gave one of the best answers I ever heard somebody give in terms of explaining why you own versus lease. And the -- I don't know if you remember this, but it really talked -- you talked well about why you make those choices because you're going to own the aircraft for x number of years or whatever. So maybe you could just talk about how you're thinking about that in line with the big CapEx plan and how you're thinking about or what you're thinking about financing that?

Yes. For us, leasing is just another form of financing. And so when we look at lease versus buy, leasing versus raising, WTC debt or other types of debt, we look at it over the full life of the aircraft. We're not that interested in taking on aircraft for 10 or 12 years. These are all core aircraft to the fleet. And so 20 to 30 years would be more of what we would think about. And once you look at it that way, it's rare for traditional operating leases to make sense. . We do have some transactions that maybe get counted as leases for accounting reasons, but embedded in those structures are effectively purchase options that we would expect to exercise. So we view those as just another form of debt financing. But it really amounts to, once you want to keep that aircraft for a long period of time, tough to make leasing work. On the other hand, we have recently done some leases to supplement our order book. So whereas the manufacturers are sold out for a number of years, leasing companies have aircraft available closer in. So it's not a meaningful number of aircraft, but it helps supplement near term, some opportunities to bring in some aircraft.

Okay. So this is the second to last question or maybe there's a few more. What didn't I ask you that I should have before I ask you some other things?

How I'm going to spend my retirement?

I was going to ask you that, that was going to be my last question actually. But you are retiring next year. I'm really saddened about that because truth be told we both know you're younger than I am. And here I am still working and loving it. But what are you going to miss most about United? I mean, other than missing like me and my peer group?

You, without any doubt or question.

It goes without saying. So what will you miss most?

I'll still be involved with ISTAT, for example. So I'll be around -- I do plan on being in Dublin in January but what will I miss most? Two things. I will miss really seeing United Next come to full fruition. We're sort of only part of the way through the process. So -- but I would be happy to sit on the sidelines and watch Scott, Andrew and the rest of the team succeed. So what's left? I miss my friends. The great thing about United and really going back to Continental, I've always enjoyed working with the people that I've worked with. And so not having that day-to-day interaction will be what I will miss most.

Okay. I think the airline industry has some amazing people, and I think the analyst community too. And I can see where you would definitely miss us.

And yes, and no one ever leaves.

They don't. They really don't.

Yes. I tell that to like analysts starting out that you're either going to love it or you're not. And I don't know how you felt when you started covering airlines, when I joined Continental in 1988, I had said 2 years, and then I'll be done because I was a lawyer in New York at the time, moved to Houston and 2 years became 35 years. And that's not an unusual story.

No. When I became an airline analyst, it was sort of the same. I was assigned at a business school, I thought I was smart, wasn't. I was assigned to the trucking and rail analyst. And after 6 months, he said we really need an airline analyst. So here's what we're going to do. And he introduced me -- I don't know if you remember, Mike Armellino. So he was the number one rated analyst at Goldman Sachs, and that was his mentor. So he introduced me to his mentor who then took me around to all the airlines. He probably cut 5 years off my career in terms of development. He told me what I had to do. What was important and yes, so to your point, people like that who helped move you forward and here we are. I admit to 4 decades. That's all in that too.

But you mentioned a good point because the one job that I have left is to make sure that all of my institutional knowledge is passed down to my successor, so that my successor can really hit the ground running.

Well, that's what I was going to -- that was going to be actually my last question. What's the best piece of advice that you will give him or her? But what's your biggest -- what do you think your biggest career accomplishment is because I feel like...

As opposed to survive -- something other than survival, right?

No, like I have 2 kids and 3 step kids that I helped to raise and I feel like they're my biggest accomplishment, right? Because knock on wood, every one of them is gainfully employed today, and they all seem to be happy and well adjusted right now. I can't speak for what will happen. But I feel like if I didn't get that right, nothing else I did in life mattered. And now I have a grand -- one grandson, that's mine and 6 that I borrow from my husband because it's our second marriage. But I adore every one of those 7 kids. And I just think that's the best thing I've ever done no matter what I accomplished in my career. And I just kind of wonder like career, I know you have Ezra and your grandson. He is what? 2 now.

He's 15, 16 months.

16 months. Okay.

And he's probably listening right now.

So what is your biggest like career accomplishment?

So given that I think at least one of my kids is listening, I can't say anything different than what you said. The most important thing was having a reasonably successful career, but still being able to have -- maintain a relationship with all my kids, which hopefully is true to this day. And the family is growing. And this is really one of the primary reasons why it's time to retire. So Ezra is going to have a little girl cousin next month.

Oh, nice. Congratulations.

Thanks and then Ezra is going to have a little brother in February.

Oh my God, that's amazing. So the family is truly growing.

Yes. By next summer, when we're all together in Vermont, we will have the 3 young ones running around. So...

Oh, that's so nice. That's funny because we're going to Antarctica this -- in February. And the whole reason we're doing it in February of 2024 is I can guarantee that not one of our kids is having a baby in February, can't guarantee the rest of the year, but they would all be crushed, if somehow we missed it, even though this will be 8, 9 and 10.

Yes. I leave those negotiations up to my wife. She and the kids, work on all that.

That's great. .

but wait, wait.

Go ahead, career?

No, what will I tell...

What will you tell your successor? What advice?

The value of partnerships. Not just the internal partnerships, which is sort of table stakes with all the other division heads, but the partnerships with the OEMs, the partnership with Boeing, which I've had for -- over my 35 years has been critical to our success in many ways. And in a partnership, it's a 2-way street. Boeing obviously has helped us a lot, but we've also been known to help Boeing as well and it's paid off huge dividends. Same thing with the other banks and pretty much anybody, the value of partnerships and building those partnerships. And that's all about trust. You can't walk in and expect the other party you're dealing with trust you on day 1, but you can quickly kind of build that trust. But I think that's a critical component to succeeding in the job.

Are they near finding somebody? I feel like you're really hard to replace. So I don't know how that's going to work out, Gerry.

As you know, everybody is replaceable.

I like to think not. I feel -- I'm going to miss you terribly because I feel like you've done so much for United, Continental before that, but really so much for United in the last decade.

We're in a good spot though.

Yes. Definitely. Okay. Anything else you wanted to say, anything else you want to talk about like I don't know, what's changed the most in the industry. I feel like not a lot but maybe a bit from perspective?

What hasn't changed is that this industry still gets hit with exogenous shots more than some industries, that hasn't changed. What has changed though is that we, as an industry, are so much better at managing through those crises than we ever were before. And having, as you know, live through crisis after crisis after crisis, I can speak from experience that the worst crisis we had was obviously COVID. And there was one or two nights in April of 2020, where maybe I lost a little bit of sleep over whether or not the industry was going to get out of it. That didn't last. And the fact that the industry is thriving once again, is a testament to how much the industry has changed.

Yes. Interesting. Well, it has. And I think people like to travel. People like to go places. I think it gives you hope.

Oh, yes. Remember what happened, we were way more pessimistic than everybody in the world about how bad it was going to be, but way more optimistic at how quickly it was going to rebound. And we were right.

We were right. Yes, it's really nice. Well, Gerry, this is sadly, our last one of these, although as we both mentioned, I'll see you in ISTAT or in Dublin, maybe. I mean, if you're having...

I'll be there.

Okay. So I'll see you there, and I'll see you at ISTAT events, although not next month, I'm going to the Sustainability Summit in Madrid.

So you won't be at ISTAT?

I won't be in London.

In London. Too bad.

Too bad for me. But anyway, thank you very much. Thank you for being here, and have a wonderful and happy and successful retirement.

Thanks. And Helane, thank you not just for the support you've give me but the support you've given both Continental the old days and United these days.

Well, my Airline of choice. I just wish you had not bested me down to 1,000 from global service. I've been trying really hard. Okay, everybody, thank you very much for being here. Thank you.